Europe’s global trade leadership stops at the digital economy

You could be forgiven for believing that the European Union is the new standard-bearer of global free trade. Brussels vowed to keep the “flag of free trade waving high” last year when it secured a landmark agreement with Japan. Since then, it has pursued an ambitious trade agenda. The European Union now aims to conclude deals with Mexico and South America and to establish a multilateral court to replace investor-state dispute settlement. But recent headlines obscure the limits of its commitment to free trade.

When it comes to the digital economy, the chief export out of Brussels is regulation. It champions red tape over open markets. The problem is the European Union’s stance on data flows. Data defines today’s digital economy, and companies in all sectors transfer data across borders to engage in international commerce on a daily basis. Government restrictions on international flows of data are the non-tariff barriers of the 21st century. China, Russia, Vietnam and others have learned to use tactics like forced data localization to protect domestic industries, strongarm foreign investment, and control the flow of information.

{mosads}To combat digital protectionism, governments committed to open markets must support strong enforceable trade disciplines that ensure the free flow of data across borders. The Trump administration has advocated for such disciplines in talks to modernize the North American Free Trade Agreement (NAFTA). Japan, meanwhile, is leading the remaining members of the Trans Pacific Partnership (TPP) toward ratification. Once implemented, TPP will put in place rules that will counter digital protectionism in the Asia Pacific region.

In contrast, Brussels opposes strong commitments to the free flow of data in trade agreements. By conflating “consumer rights” with “human rights,” the European Union obstructs data transfers to countries that do not copy and paste its own heavy-handed privacy regulations into their domestic laws. In truth, its motivations have less to do with “rights” than market share. The European Union has no Silicon Valley. Instead, it wants to “level the playing field” with its American and Asian rivals by subjecting them to the same rules that burden European companies. A standard bearer for digital free trade would do the opposite.

Central to the strategy of Brussels is the General Data Protection Regulation (GDPR), which touches on almost all aspects of digital commerce. Because of its sweeping extraterritorial provisions, it applies to any company that does meaningful business with Europeans. Multinationals end up scaling the GDPR on a global basis not only to retain access to the European Union’s single market, but to make the most of sunk compliance costs. It is no exaggeration, therefore, to say that the GDPR will soon be the world’s de facto consumer privacy regulation.

Yet the success of Brussels at exporting regulations has encouraged it to stall real free trade negotiations. Long before the U.S. withdrawal from TPP, the agreement between Brussels and Tokyo was bogged down by, among other things, European intransigence on data flows. The European Union similarly brought down negotiations of the World Trade Organization’s Trade in Services Agreement in 2016. We should expect the same tactics if talks on the Transatlantic Trade and Investment Partnership, a bilateral agreement between the European Union and the United States, are revived.

Strong enforceable rules for the digital economy are needed to update the global trading architecture and deter protectionism coming from China, Russia, India and elsewhere. If the European Union is serious about leading the global free trade regime, then Brussels must update its policies for the 21st century. It can start by following the example set by President Trump in NAFTA talks, as well as Japan and other responsible governments committed to digital free trade.

Evangelos Razis is a policy analyst at Fujitsu, a leading global technology company. The views expressed in this column are his own.